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Morningstar | Investors Shouldn't Worry MSCI Is Spending More, Perhaps They Should Be Applauding

Ending what had been a remarkable run of elevated growth, wide-moat MSCI reported its first sequential decline in quarterly revenue since 2016, as the company ended the September quarter with $357.9 million in revenue, down 1.4% sequentially. Although MSCI continues to do everything a long-term investor could ask for, MSCI indexes third-quarter average assets under management were down 2.6% when compared with the June quarter, which proved to be too steep of a hill to climb for the firm to generate sequential revenue growth. The rest of MSCI's business was healthy, but still grew at a slower pace than in recent quarters. Recurring index subscription revenue grew 1.4% sequentially, while total analytics revenues expanded  0.7%. Despite this deceleration in growth, MSCI continues to outpace our expectations,and in light of this we've increased our fair value estimate to $119 per share from $118. While the company's shares have fallen about 18% since the start of October, the stock is still not cheap. We expect that someday MSCI will trade below our fair value estimate and we’ll be more enthusiastic about its shares; however, today is not that day.

During the call, management created some consternation by raising the company's expense guidance, noting that fourth-quarter operating expenses are likely to be about $10 million higher than the previous quarter. This is attributable to higher investment in marketing and severance. We continue to believe that MSCI has no shortage of areas to deploy cash and generate high returns. If we were to complain about anything, it is that MSCI's spending has been too low. We feel that a fair amount of MSCI's success has been serendipitous, and that if the company doesn't invest enough in its business that it will be increasingly difficult for the firm to create the intellectual property that it will nee to successfully launch new products well into the future.

While environmental, social and governance, or ESG, investing was mentioned twelve fewer times during the company's quarterly conference call (down from 37 times during the second-quarter call), it is not a reflection of the growing importance of these products to MSCI. The company's third-quarter ESG Index and Content run rate was $101 million, an increase of $5 million from the second quarter, while revenues from MSCI's Other segment, which houses the firm's content revenue, actually declined during the quarter. Although total Other revenues declined 2.8% from the previous quarter, it is likely related more to timing than anything performance related. We were also intrigued by MSCI's success with "a very large Asian securities firm" licensing its WealthBench to aid the transformation of that firm’s wealth business from a traditional brokerage business to an advisory model. WealthBench is a web‐based platform geared toward relationship managers and investment advisors to help them assess portfolio risk, construct asset allocation policy and create comprehensive client proposals as part of their investment planning processes.